Better budgeting: despite their alleged demise, budgets still remain a popular fixture--how we define them and the cultures in which we use them are simply changing with the times.

"The budget is dead. Long live the budget." That seemed to be the central message of a report released this summer by the Chartered Institute of Management Accountants (CIMA) and the Institute of Chartered Accountants in England and Wales (ICAEW). Called Better Budgeting, the report was based on a forum the organizations presented jointly this past spring.

The report notes that no one is really in love with budgeting--there are still many disadvantages. Principal among these are the way budgets can stifle creativity, entrepreneurial spirit, or a risk-taking culture; make businesses abandon projects because the money has been spent for the year; or make a company too inward, concentrating on details of the budget rather than on competitiveness and agility--"gaming" to keep control of enough resources or capture more.

Yet, the budget still provides a focus for the organization and "aids the coordination of activities and facilitates control," part of the definition of a budget, as quoted from CIMA's Official Terminology of Management Accounting.

"Large companies in particular would struggle to plan, coordinate and control without such a framework," notes the report.

Abandoning ship?

Of course the real crux of the issue is how you define control. "There are lots of roles a budget can play," notes Murray Lindsay, CMA, an associate professor at the Richard Ivey School of Business, University of Western Ontario. "Profit planning, organizing resources, motivation, performance evaluation, coordinating business--we often ask it to play many roles. In some cases, when a business is very stable, a traditional budget works very well. If a company is at capacity and simply has to maintain itself, budgeting isn't a problem. But when we have to adapt, used in the traditional sense, budgets can impede a company's adaptability."

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Lindsay and Theresa Libby, CA, an associate professor in the School of Business and Economics at Wilfrid Laurier University, are currently conducting a comprehensive CMA Canada-sponsored study of the state of budgeting and control in North American companies. They have thus far conducted a preliminary study of businesses in Canada and their attitudes towards budgeting. Further field studies in Canada and the U.S. are currently under way.

The process of setting a budget can be very helpful, Lindsay readily admits. "The process of setting up a budget allows you to see how the world is unfolding," he says. But that doesn't mean that everyone is happy with it. Preliminary evidence from their study suggests that many companies aren't pleased.

When asked the question, "Are budgets being used for managerial motivation and as a standard for performance evaluation purposes," 83% of respondents said yes. Of that group, however, about 46% suggested that their firm is considering abandoning budgets as a tool for such control.

A study of major European organizations at Cranfield School of Management in the U.K. suggests the same disappointment with the process. In this study, companies found budgets time-consuming, expensive, and rarely strategically focused. With or without a budget, companies the world over are looking for a new way to look at how they motivate individuals, reach targets and remain agile.

Building trust

Of all the benefits brought to the table by budgets, the CIMA/ICAEW report notes that the framework a budget creates is the most highly valued among companies--providing a road map explaining where the company is, where it wants to go and how it will get there.

But budgets now have to be more flexible, and this seems to be the most important point made by the report and by Lindsay. As the report says, "budgeting may provide you with a map but if you drive with your eyes closed, you will crash anyway." Openness and flexibility are the cornerstones to an effective budget. With these qualities, the budget can contribute to value creation, inform strategic development, risk management planning and resource allocation.

Part of the reason budgeting has changed and why budgets can be more flexible, as Better Budgeting notes, is that information can be gathered much more easily now than was possible even a decade ago. Because data is collected, stored and analyzed more readily, frequent reforecasting and adaptation is possible if an organization is willing to invest the time to set up the systems. This allows the budget to be forward looking and more strategic, and forecasts can be more precise. Some participants in the CIMA/ICAEW budgeting forum actually suggested that forecasts are more important than budgets in their businesses.

The ultimate challenge is creating a culture that can handle change--where information flows effectively and trust is a valued asset. Unfortunately, not every business can manage without a budget and its constraints because the company's business culture doesn't allow for the flexibility and trust necessary to make what we might call a "decentralized" budget possible. A company culture may depend on budgets for incentive programs and management control. It also may find it difficult to create a system of accountability that isn't hindered by blame and mistrust.

If a culture of empowerment and trust is created in a company, it can facilitate a more open adaptation of budgets. Many forward-thinking companies appear to be taking this route, finding new types of incentives to drive success in their company while creating greater accountability.

Watch for updates in CMA Management of Lindsay and Libby's ongoing North American budgeting research, and visit their Web site, www.budgeting-reconsidered.com, for more information. For the full text of Better Budgeting and presentations from the forum, visit www.cimaglobal.com/downloads/betterbudgeting_joint.pdf.

Robert Colman is editor-in-chief of CMA Management.